UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0 - 7619
POWERSOFT TECHNOLOGIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 93-0636333
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
650 West Georgia Street, Suite 1600, P.O. Box 11586,
Vancouver, British Columbia, CANADA V6B 4N8
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(604) 685-8318
-----------------------------
(registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Name of exchange on which registered:
$0.01 Par Value common stock OTC Bulletin Board
- ---------------------------- ------------------------------------
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 17, 1999, the aggregate market value of the voting common equity held
by non-affiliates of the registrant, based on the closing price of $0.022 on
that date, was approximately $158,028.
As of June 17, 1999, the registrant had outstanding 29,259,542 shares of common
stock.
INDEX TO FORM 10-K
OF
POWERSOFT TECHNOLOGIES, INC.
Page
PART I
Item 1. Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for registrant's Securities and Related Stockholder Matters 9
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 19
PART III
Item 10. Directors and Executive Officers of the registrant 19
2
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits and Reports on Form 8-K 24
(a) Exhibits
(b) Reports on Form 8-K
Signatures 25
3
PART I
ITEM 1. BUSINESS
Powersoft Technologies, Inc. ("Company") was originally organized in California
on March 24, 1958 as Time Saver Markets, Inc. From 1958 to 1994, the Company
effected numerous name changes and engaged in businesses other than those it
presently operates. In August 1994, the Company changed its corporate domicile
to Delaware. In November 1994, the Company, then known as Alpine International
Corp. changed its name to Heng Fai China Industries, Inc. On March 31, 1998,
Heng Fai China Industries, Inc. changed its name to Powersoft Technologies Inc.
The Company has signed an agreement ("SAR Agreement"), to sell most of its
subsidiaries, and as a result, most of its operations to SAR Trading Limited,
("SAR"), a company wholly owned by Fai H. Chan, an officer, director and
shareholder of the Company. Upon shareholder approval of the SAR Agreement, the
Company intends to focus its operations on the acquisition of companies
operating in the fields of computer technology and the Internet,
telecommunications and financial software applications for the securities
industry.
As of December 31, 1998, the Company's investments were as follows:
Name % Owned State/Foreign Incorporation
- ---------------------------- ------------- ---------------------------
Cangzhou Min You 19%(1) People's Republic of China
Cement Co., Ltd.
Vancouver Hong Kong 100%(2) Canada
Properties Ltd.
America & China Business 100% Canada
and Development Inc.
Heng Fai Management Inc. 100%(2) British Virgin Islands
Heng Fai China & Asia 100%(2) Hong Kong
Industries Limited
Heng Fai China 100%(2) Hong Kong
Industries Limited
Worldwide Container 100%(2) Hong Kong
Company Limited
Heng Fai China Industries 100%(2) Hong Kong
Acquisition Limited
Greatly Hong Kong Limited 100%(2) Hong Kong
(1) As of July 24, 1998, the Company divested 81% of its interest in Cangzhou
Min You Cement Co., Ltd.
(2) These subsidiaries are the subject of the SAR Agreement wherein SAR agreed
to buy and the Company agreed to sell all of its interests in these
subsidiaries for approximately $4,838,000 in the form of the assumption of
certain liabilities. In consideration of the assumption of liabilities, the
Company agreed to issue two notes payable to SAR in the amounts of
$1,000,000 and $2,472,272, which is the $3,838,000 difference, net of
related party accounts receivable of $1,365,278. The $1,000,000 note is
4
immediately convertible into 20,000,000 common shares of the Company. The
$2,472,272 note can be converted into shares of common stock of the
Company, in minimum increments of $250,000 each, at the average 15 day
trading price of the Company's common stock at the option of the Company by
giving seven trading days notice in writing to SAR. The agreement is
subject to shareholder approval.
Agreement with CyberConstruction Company, Inc.
On February 12, 1999, the Company entered into a Technology License and Services
Agreement (the "Agreement") with CyberConstruction Company, Inc. ("Cyber").
Cyber has developed and continues to develop certain software applications,
methods, operating procedures, Internet infrastructure design and Internet site
template development (collectively the "Technology"). The Agreement grants a
nontransferable license to the Company to use and execute this Technology
developed by Cyber, along with related services, for the Company's customers.
The Company agrees to grant and transfer to Cyber, as a consideration of the
license and related services, its preferred stock with a face value of $10
million, as part of an issuance of up to $50 million of its preferred shares.
The Company has agreed that upon the sooner of (i) the licensing or acquisition
of technologies utilizing the $50 million proceeds from the sale of preferred
shares; or (ii) February 13, 2001. The transaction contemplated by the agreement
has not yet been consummated and consequently, has not yet been recorded.
Historical Information
In 1994, the Company acquired Vancouver Hong Kong Properties Ltd., a Canadian
corporation ("Vancouver Hong Kong"), which owns an apartment building in North
Vancouver, British Columbia ("Apartment Building").
In January 1995, the Company acquired a wholly-owned subsidiary, Heng Fai China
& Asia Industries Limited ("Asia"), a company incorporated in Hong Kong, along
with Asia's wholly-owned subsidiary, Heng Fai China Industries Limited
("China"). China is incorporated in Hong Kong and owned options ("Option") to
acquire, through its wholly owned subsidiary, Cangzhou Min You Cement Co., Ltd.,
a foreign-owned enterprise registered in the People's Republic of China ("PRC")
("Min You"), direct or joint venture operating lease interests in the following
three cement factories in the Hebei province of PRC: (i) the Hebei Cangzhou City
Chemical Corporation Factory ("Cangzhou Factory"); (ii) the Qingxian Cement
Factory ("Qingxian Factory"); and (iii) the Hebei Cangzhou Area Construction
Materials Factory ("Hebei Factory"). Min You did not exercise its Options to
acquire interests in the Qingxian Factory and the Hebei Factory, and such
Options have since expired.
In April 1995, Min You exercised an Option to lease a production line at the
Cangzhou Factory. Such lease provided for the use of the production line at
Cangzhou Factory for a five year period commencing January 1, 1995.
In September 1996, the Company, through its wholly owned subsidiary, Worldwide
Container Company, Ltd. ("Worldwide"), acquired a 70% interest in Wuhan Monkey
King Container Co., Ltd. ("Wuhan"), in exchange for 727,272 shares of the
Company's restricted Common Stock. Wuhan is a sino-foreign equity joint venture
registered in PRC which is engaged in the design, manufacture, lease and repair
of standard and non-standard containers and related steel structure products.
In January 1997, the Company acquired from Fai H. Chan, an officer, director and
shareholder of the Company, 100% of the outstanding common stock of Greatly Hong
Kong Limited ("Greatly HK") in exchange for nominal consideration. Greatly HK
had a 25% interest in Hebei Cherry Valley Duck Ltd. ("Duck Farm"), a cooperative
joint venture established in the PRC which was engaged in the management and
operation of a duck farm in PRC. The investment was wholly financed by an
interest free, short term advance from Fai H. Chan. Other than the investment in
the Duck Farm and advance from Fai H. Chan, Greatly HK had no other material
assets and liabilities, or operations at the time of acquisition.
5
In March 1997, the Company acquired from Fai H. Chan, an officer, director and
shareholder of the Company, 100% of the outstanding common stock Heng Fai China
Industries Acquisition Limited ("Heng Fai Acquisition") in exchange for nominal
consideration. Heng Fai Acquisition had an option to form a cooperative joint
venture in PRC, but otherwise had no material assets and liabilities, or
operations at the time of acquisition. Heng Fai Acquisition entered into a
conditional agreement ("Agreement") with an unaffiliated party in PRC ("PRC
Party") to establish a joint venture, Heng Li (Zhangjiagang Free Trade Zone)
International Trading and Development Co., Ltd. ("Heng Li"), to develop and
construct a commercial building in Zhangjiagang Free Trade Zone, PRC. However,
the Agreement was not completed and an application has been submitted to cancel
the registration of Heng Li.
1997 Divestitures
After several years of direct investments in PRC, as described above, the
Company believed the returns on such investments were unsatisfactory. The
Company believed its best course of action was to write-off or discontinue a
substantial part of its PRC operations ("Divestiture"). Pursuant to
reorganization, the Company commenced the Divestiture and entered into the
following agreements to terminate or substantially reduce its interest in its
PRC operations as follows:
Min You. In December 1997, the Company, through China, transferred 81% of its
interest in Min You to two unrelated parties in Hong Kong and PRC. China
retained a 19% interest in Min You and full provisions have been made against
the remaining cost of investment in Min You. Applications for the change in
ownership in Min You have been approved by the respective authorities in PRC.
Wuhan. In December 1997, the Company effected an agreement to reverse the
acquisition by returning its 70% interest in Wuhan and to redeem the 727,272
shares of restricted Common Stock previously issued pursuant to the acquisition.
Applications for the change in ownership in Wuhan have been approved by the
respective authorities of PRC during 1998.
Duck Farm. In December 23, 1997, Greatly HK effected an agreement to dispose of
its 25% interest in the Duck Farm. Applications for the change in ownership of
the Duck Farm have been approved by the respective authorities in PRC during
1998.
Heng Li. Heng Fai Acquisition did not exercise its option to form Heng Li as
certain conditions of the joint venture agreement were not met. In December
1997, the Company canceled the registration of Heng Li.
Segment Information
Information pertaining to the Company's two operating segments, Investments and
Real Estate, are in Footnote 13 in the accompanying consolidated financial
statements.
Real Estate Operations
The Company operates an apartment building, Lord Highlands Apartments, 260 East
12 Street, North Vancouver, British Columbia, Canada V7L 2J6 ("Apartment
Building"), located within the Central Lonsdale area of the City of North
Vancouver, British Columbia. Developments in the immediate area consist
primarily of low to medium density residential units, with commercial
development focused along Lonsdale Avenue to the west and the more prominent
cross streets such as 13th Street and 15th Street. Lions Gate Hospital, a
principal medical facility, is located just north of the apartment building at
the intersection of East 13th Street and St. George Avenue.
6
The Central Lonsdale corridor serves as the primary commercial center for the
city and the surrounding areas of North Vancouver. Residential development in
the surrounding areas consists of a variety of 3-story rental and strata tiled
apartments, plus lower density townhouse developments. The area also has higher
density development in the area. Thus, the apartment building is located within
a stable multiple residential oriented neighborhood, located in close proximity
to local retail, recreational and public amenities.
The following information has been extracted from the Canada Housing
Corporation's ("CMHC") Vancouver CMA Rental Market Report.
Vacancy Rates
Region 12/98 12/97 12/96
- ------------------------------ ---------- --------- ----------
City North of Vancouver 1.9% 0.6% 0.6%
- ----------------------- ---- ---- ----
District North of Vancouver 1.2% 0.2% 0.2%
- --------------------------- ---- ---- ----
Metro Vancouver 1.5% 1.5% 1.2%
- --------------- ---- ---- ----
Apartment Rental Rates
City North of Vancouver 12/98 12/97 12/96
- ------------------------------ ---------- --------- ----------
Bachelor CDN$607 CDN$574 CDN$572
- -------- ------- ------- -------
One Bedroom CDN$705 CDN$703 CDN$688
- ----------- ------- ------- -------
Two Bedroom CDN$859 CDN$971 CDN$967
- ----------- ------- ------- -------
The Apartment Building is a 60 unit, three-story wood frame building constructed
in the late 1960's. The building has a below grade basement containing the
mechanical rooms, various storage rooms, workshops and recreational areas. The
apartment building has a total of 60 suites consisting of one bachelor suite, 38
one bedroom suites and 21 two bedrooms suites. Twelve of the two bedrooms
suites, located on the corners of the building offer wood burning fireplaces.
The suites are generally larger than average and on the whole, have been well
maintained. General finishing details include hardwood floors or wall-to-wall
carpeting with vinyl flooring in the kitchens and bathrooms, adequate
cabinet/counter space in the kitchens with two appliances, partly tiled shower
surrounds in the bathroom and covered balconies or patios. Paved open parking
for 60 vehicles is provided at the rear of the apartment building. Access/egress
is available by a paved rear service lane off St. Andrews Avenue.
Apartment Building Rental Rates
The current monthly rents* are as follows:
Suite Type Monthly Rent
- ------------------------------- -----------------------------
Bachelor CDN$580
One Bedroom CDN$660
Two Bedroom CDN$805
- -------------
* Rent includes heat, hot water, parking and cable television.
7
The above survey supports the conclusion that the monthly rents within the
subject are reasonably in line with market rents, taking into account the size
and condition of the units plus the inclusions in the monthly rent.
8
Employees
The Company currently employs 5 persons, 2 of which oversee the operations of
the Apartment Building, and 1 monitors the operations in PRC. The Company
believes that its relationship with its employees is good.
Government Regulation
The Company is not aware of any government regulations in the United States or
Canada which could materially adversely affect its business or operations in
Canada. The Company's participation in the operations of the Apartment Building
are subject to significant governmental regulation in Canada and the Company
believes it is in compliance with such regulations to the extent the same are
applicable to the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive offices at 650 West Georgia Street,
Vancouver, British Columbia, Canada. The offices are suitable for the needs of
the Company.
In June 1998, the Company transferred a lease for an office at 45 Wall Street,
New York, New York to eVision USA.Com, Inc., formerly known as Fronteer
Financial Holdings, Ltd., a company of which Fai H. Chan is an officer, director
and shareholder.
The Company also operates the Apartment Building, composed of 60 individual
residential units in a three story frame building situated at the corner of East
12 Street and St. Andrews Avenue in North Vancouver, British Columbia, Canada.
The Apartment Building is approximately 57,340 square feet and is situated on
approximately 1,109 acres of land. It is owned by the Company, subject to first
and second mortgages. The land underlying the Apartment Building is leased and
such lease terminates on May 31, 2032, subject to earlier termination in certain
circumstances. The annual lease cost for the land is fixed at $71,115 until the
year 2010, after which time it will be renegotiated for the remaining term.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending or ongoing litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, no matters were placed before the
stockholders of the Company for consideration.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Bulletin Board ("OTC"). However,
there is no established public trading market for the Company's common stock.
The following table sets forth, for the periods indicated, the reported high and
low bid price quotations for the Common Stock for the periods such securities
have been reported on the OTC. Such quotations reflect inter-dealer prices, but
do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
9
Common Stock
High Bid Low Bid
------------ -----------
Year ended December 31, 1998:
- ----------------------------
First Quarter $ 0.245 $ 0.10
Second Quarter 0.210 0.12
Third Quarter 0.130 0.09
Fourth Quarter 0.085 0.05
Year ended December 31, 1997:
- ----------------------------
First Quarter 1.875 0.53
Second Quarter 0.813 0.34
Third Quarter 0.600 0.24
Fourth Quarter 0.265 0.11
As of June 17, 1999, there were approximately 1,447 holders of record of the
common stock based upon information furnished by OTR/Oxford Transfer & Registrar
Securities Agent, the transfer agent for the common stock. The number of record
holders does not include holders whose securities are held in street name. The
closing price of the common stock as reported on the Bulletin Board on June 17,
1999 was $0.022. As of June 17, 1999, there were 29,259,542 shares of common
stock outstanding.
The Company has never paid and does not anticipate paying any cash dividends on
its common stock in the foreseeable future. The Company intends to retain all
earnings for use in the Company's business operations and in the expansion of
its business.
Recent Issuance of Unregistered Securities
During 1996, 100,000 shares of common stock were issued pursuant to a consulting
agreement with a previously unaffiliated party entered into during 1995. The
value attributable to the 100,000 shares of common stock issued of $581,000 was
charged to the statement of income in 1996 and recognized as consulting fees.
The issuance of the common stock was made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(1933 Act). The purchaser had access to full information concerning the Company
and represented that it purchased the common stock for the purchaser's own
account and not for the purpose of distribution. The common stock contains a
restrictive legend advising that the securities represented by the common stock
may not be offered for sale, sold or otherwise transferred without having first
been registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. No underwriters were involved in the transaction.
In September 1996, the Company entered into a consulting agreement with a
previously unaffiliated party pursuant to which it received various investor
relations and financial advisory services. The consulting agreement had a term
of 12 months, subject to earlier termination thereof or renewal for subsequent
periods. Pursuant to the terms of the agreement, the Company issued an aggregate
of 300,000 shares of common stock to the consultant in September 1996. The value
attributable to the 300,000 shares of common stock issued was $319,500, which
had been capitalized and was amortized over the 12 months term of the consulting
agreement. The issuance of the common stock was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (1933 Act). The purchaser had access to full information
concerning the Company and represented that it purchased the common stock for
the purchaser's own account and not for the purpose of distribution. The common
stock contains a restrictive legend advising that the securities represented by
10
the common stock may not be offered for sale, sold or otherwise transferred
without having first been registered under the 1933 Act or pursuant to an
exemption from registration under the 1933 Act. No underwriters were involved in
the transaction.
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of
common stock at $0.60 per share to Fai H. Chan (1,300,000 shares), Ronald M. Lau
(100,000 shares), Robert H. Trapp (100,000 shares) and Keow Y. Chan (200,000
shares) pursuant to private placements for aggregate proceeds of $1,020,000.
Except for Keow Y. Chan who is Fai H. Chan's wife, all of the above parties were
directors of the Company at that time. The issuance of the common stock was made
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (1933 Act). The purchaser had access to full
information concerning the Company and represented that it purchased the common
stock for the purchaser's own account and not for the purpose of distribution.
The common stock contains a restrictive legend advising that the securities
represented by the common stock may not be offered for sale, sold or otherwise
transferred without having first been registered under the 1933 Act or pursuant
to an exemption from registration under the 1933 Act. No underwriters were
involved in the transaction.
On June 25, 1997, the Company issued 2,500,000 shares of common stock at $0.24
per share to Fai H. Chan pursuant to a private placement for proceeds of
$600,000. The issuance of the common stock was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (1933 Act). The purchaser had access to full information
concerning the Company and represented that it purchased the common stock for
the purchaser's own account and not for the purpose of distribution. The common
stock contains a restrictive legend advising that the securities represented by
the common stock may not be offered for sale, sold or otherwise transferred
without having first been registered under the 1933 Act or pursuant to an
exemption from registration under the 1933 Act. No underwriters were involved in
the transaction.
In August 1997, the Company entered into a consulting agreement with a
previously unaffiliated party pursuant to which it received various investor
relations and financial advisory services. The consulting agreement had a term
of 12 months, subject to earlier termination thereof or renewal for subsequent
periods. During 1997, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement. The value attributable to the
100,000 shares of common stock issued was $100,000, which had been capitalized
and was amortized over the 12-month term of the consulting agreement. The
issuance of the common stock was made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(1933 Act). The purchaser had access to full information concerning the Company
and represented that it purchased the common stock for the purchaser's own
account and not for the purpose of distribution. The common stock contains a
restrictive legend advising that the securities represented by the common stock
may not be offered for sale, sold or otherwise transferred without having first
been registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. No underwriters were involved in the transaction.
There were no issuances of the Company's common stock during 1998.
On January 18, 1999, the Company entered into an agreement with SAR Trading
Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of
its interests in the majority of its subsidiaries for approximately $4,838,000
in the form of the assumption of certain liabilities. In consideration of the
assumption of liabilities, the Company agreed to issue two notes payable to SAR
in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is immediately
convertible into 20,000,000 common shares of the Company. The $3,838,000 note
can be converted into shares of common stock of the Company, in minimum
increments of $250,000 each, at the average 15 day trading price at the option
of the Company by giving seven trading days notice in writing to SAR. SAR is
owned 100% by Fai H. Chan. The agreement is subject to shareholder approval. The
issuance of the note convertible into common stock was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (1933 Act). The purchaser had access to full information
concerning the Company and represented that it purchased the common stock for
the purchaser's own account and not for the purpose of distribution. The common
stock will contain a restrictive legend advising that the securities represented
11
by the common stock may not be offered for sale, sold or otherwise transferred
without having first been registered under the 1933 Act or pursuant to an
exemption from registration under the 1933 Act. No underwriters were involved in
the transaction.
On February 5, 1999, the Board of Directors approved a resolution to give
13,700,000 shares of common stock of the Company to SAR Trading Limited in
exchange for the forgiveness of debt totaling $685,000. The issuance of the
common stock was made in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The
purchaser had access to full information concerning the Company and represented
that it purchased the common stock for the purchaser's own account and not for
the purpose of distribution. The common stock contains a restrictive legend
advising that the securities represented by the common stock may not be offered
for sale, sold or otherwise transferred without having first been registered
under the 1933 Act or pursuant to an exemption from registration under the 1933
Act. No underwriters were involved in the transaction.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and its
subsidiaries. The selected consolidated financial data in the table for the
Company's five years ended December 31, 1998, 1997, 1996, 1995 and 1994, are
derived primarily from the consolidated financial statements included elsewhere
herein. The data should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition," the consolidated
financial statements of the Company and related notes thereto and other
financial information included elsewhere herein. All dollar amounts reflect U.S.
Dollars.
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net operating revenues $ 320,630 571,921 428,858 354,952 333,319
(Loss) income from
continuing operations (1,077,133) (1,217,418) (2,061,732) (1,880,672) 27,315
Total assets 1,215,766 2,388,062 10,625,380 1,723,856 1,129,696
Long-term obligations:
Mortgage loans
payable 710,277 837,966 865,594 975,108 971,611
Long-term note payable -- -- 88,744 91,415 --
Per common share,
basic and diluted:
(Loss) income from
continuing operations (0.07) (0.08) (0.18) (0.18) 0.02
Cash dividends per
common share -- -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related Notes thereto, and other
financial information included elsewhere herein. The financial statements of the
Company are prepared in conformity with United States generally accepted
accounting principles.
12
Introduction
The Company was originally incorporated in 1958 and until June 1994 had been
engaged in business other than those it presently operates.
The Company owns an Apartment Building in North Vancouver, British Columbia, and
until June 1995 the Company's operations were comprised of that single segment.
In 1995 and 1996, the Company, through various subsidiaries, acquired certain
interests in PRC, including:
(i) Min You, which has an option to lease a production line in
Cangzhou Factory for cement manufacturing;
(ii) a 70% interest in Wuhan, a PRC container manufacturer;
(iii) an interest in the Duck Farm pursuant to which the Company
operated a duck farm in PRC; and
(iv) an option to form Heng Li in order to develop a commercial
building in Zhangjiagang Free Trade Zone, PRC.
In the fourth quarter of 1997, the Company determined that it would discontinue
substantially all of its operations in PRC. The Divestiture included (i) the
transfer of 81% of the Company's interest in Min You to two unrelated parties;
(ii) effecting an agreement to reverse the acquisition of a 70% interest in
Wuhan; (iii) the termination of the Company's interest in the Duck Farm; and
(iv) the termination of the Heng Li joint venture agreement.
As of December 31, 1998, the Company retained a 19% interest in Min You, but
full provisions have been made against the remaining cost of investment in Min
You, and 100% of the outstanding capital stock of Vancouver Hong Kong.
On January 18, 1999, the Company entered into an agreement with SAR Trading
Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of
its interests in the majority of its subsidiaries for approximately $4,838,000
in the form of the assumption of certain liabilities. In consideration of the
assumption of liabilities, the Company agreed to issue two notes payable to SAR
in the amounts of $1,000,000 and $2,472,272, which is the $3,838,000 difference,
net of related party accounts receivable of $1,365,278. The $1,000,000 note is
immediately convertible into 20,000,000 common shares of the Company at a
conversion price of $0.05 per share. The $3,838,000 note can be converted into
shares of common stock of the Company, in minimum increments of $250,000 each,
at the average 15 day trading price of the Company's common stock at the option
of the Company by giving seven trading days notice in writing to SAR. The
agreement is subject to shareholder approval. This transaction essentially
liquidates the operations of the Company and transfers control of the Company to
SAR.
On February 5, 1999, 13,700,000 shares of common stock of the Company were
issued to SAR in exchange for forgiveness of debt of $685,000.
Results of Continuing Operations
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
There were no significant changes in the revenues and expenses attributable to
the operation of Vancouver Hong Kong's real estate between the year ended
December 31, 1998 and the year ended December 31, 1997.
Investment income decreased from income of $138,794 through December 31, 1997 to
a loss of $25,154 through December 31, 1998. The Company has not engaged in
investment activity during the year ended December 31, 1998. This is because of
the uncertainty related to the international securities markets. The net
investment loss in 1998 consists of the loss due to the expiration of the
warrants, amounting to $145,800 and interest income.
13
Consulting expense decreased from an aggregate of $772,250 for the year ended
December 31, 1997 to $562,500 for the year ended December 31, 1998, due to
amortization period of certain consulting agreements expiring early in 1998.
Interest expense increased from $309,201 for the year ended December 31, 1997 to
$492,804 for the same period in 1998.
The Company's net loss from continuing operations was $1,077,133 for the year
ended December 31, 1998, as compared to a net loss of $1,217,418 for the year
ended December 31, 1997. The reasons for the trend are the reductions in the
other operating administrative expenses and consulting fees during the year
ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
The Company's net loss from continuing operations for the year ended December
31, 1997 was $1,217,418, a change of $844,314 compared to a net loss of
$2,061,732 for the year ended December 31, 1996. The decrease in the net loss
was primarily due to (i) an increase in investment income; (ii) a decrease in
consulting fees paid.
Consolidated revenues increased to $571,921 for the year ended December 31,
1997, from $428,858 for the year ended December 31, 1996. This is due to the
gains that have been recorded in connection with its investment securities.
In the operation of Vancouver Hong Kong's real estate, the Company experienced
an increase in rental income of $9,884 from 1996 to 1997. Also property expenses
decreased by $20,637 in 1997 as compared to 1996. This is because of cost
controls applied to repairs, utilities and management fee expenses.
Operating expenses decreased from $2,490,590 in 1996 to $1,789,339 in 1997. The
decrease is primarily due to the reduced use of consultants for investor
relations and financial advice. Such expenses have declined from $1,368,567 in
1996 to an aggregate of $272,250 in 1997.
In addition to the above consulting fees, there has been an increase in interest
expense, from $121,436 in 1996 to $309,201 in 1997. This is primarily due to the
increase in margin borrowings in 1997, from $489,193 at December 31, 1996, to
$3,058,295 at December 31, 1997.
The Company holds certain equity securities that are available for sale. The
Company records unrealized gains and losses, as a component of equity. The net
unrealized losses so recorded during 1997 amounted to $2,228,442. The cumulative
net losses charged to equity as of December 31, 1997 are $2,307,267.
The Company holds certain equity securities that are available for sale. The
Company records unrealized gains and losses, net of applicable taxes, as a
component of equity. The cumulative net unrealized losses so recorded as of
December 31, 1996 amounted to $78,825.
Inflation
The effect on inflation on the Company's operations is not material and is not
anticipated to have any material effect in the future.
14
Discontinued Operations
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
In 1997, the cement operation of Min You recorded sales of $306,398 compared to
$540,191 in the year ended December 31, 1996. At the same time, the net loss
amounted to $157,117 in 1997 compared to a loss of $62,487 in 1996.
In 1997, the container operation of Wuhan recorded sales of $2,934,871 as
compared to $1,082,317 in 1996. At the same time, the net loss amounted to
$248,210 in 1997 compared to a loss of $241,208 in 1996.
During 1997, the Company acquired and later disposed of a 25% interest in the
Duck Farm. The aggregate of the Company's share of the loss in the Duck Farm and
the loss on disposition was approximately $300,000.
Liquidity and Capital Resources
The net cash used by operating activities for the year ended December 31, 1998
amounted to $26,606. The Company meets its working capital requirements from the
proceeds of margin loans, described below and the collection of amounts from
related parties.
During the year ended December 31, 1998, the Company did not make additional
cash investments in securities or facilities.
The net cash provided by financing activities amounted to $56,682 for the year
ended December 31, 1998. This is due primarily to the increase in the margin
loan payable.
The net cash used in operating activities for year ended December 31, 1997
amounted to $4,034,680. This was primarily due to the operating losses
experienced, increases in receivable from the container segment and the payment
of amounts that were payable to related parties. The Company met its capital
requirements from the proceeds of bank borrowings and the issuance of common
shares.
The net cash provided by financing activities amounted to $7,179,780 for the
year ended December 31, 1997. This is due to the increases in short term
borrowings, margin loans, and the issuance of common shares.
As discussed in Note 2 of the notes to the consolidated financial statements,
the Company's operating losses and deficiency in net tangible assets raise
substantial doubts concerning the Company's ability to continue as a going
concern. However, the Company's principal shareholder has agreed to continue to
provide the Company with necessary financial support.
New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for years beginning after June 15, 1999, although early adoption is
permitted.
During April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities".
Generally, the Statement requires that the costs of start-up activities shall be
expensed as incurred, and that upon initial adoption an adjustment to reflect
the cumulative effect of a change in accounting principle shall be recorded.
This statement will be effective for periods beginning after December 15, 1998,
with earlier application permitted.
15
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends the disclosure
requirements for pensions and other postretirement benefits. Adoption of the
standard will not significantly change the Company's financial statement
disclosure.
The Company believes that the effects of adopting these standards will not be
material to the Company's financial position or results of operations.
Regional Economic Developments
Several countries in Asia have recently experienced significant adverse economic
developments including substantial exchange rate fluctuations, inflation, social
unrest, increased interest rates, reduced economic growth rates, corporate
bankruptcies, declines in the market value of shares listed on stock exchanges,
emergency loan agreements with the International Monetary Fund and
government-imposed austerity measures. To date, neither the PRC nor Hong Kong
has experienced these developments will not occur in the PRC or Hong Kong in the
future, which could have a material effect on a Company's financial condition or
results of operations.
The Year 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected ranging from complex information technology ("IT") computer
systems to non-IT devices such as an individual machine's programmable logic
controller.
To address this issue, the Company developed a corporate plan including the
formation of a team consisting of internal resources and, as deemed necessary,
third-party experts. The phases of the plan include: conducting inventory of the
affected technology and assessing the impact of the Year 2000 issue; developing
solution plans; modification or replacement; testing and certification; and
developing contingency plans. All components of software and hardware of the
Company are presently in various phases. The Company expects to have critical IT
systems tested and installed, and expects to be Year 2000 compliant by
mid-calendar year 1999.
The Company relies on third-party suppliers for many services and the Company
will be adversely impacted if these suppliers do not make the necessary changes
to their own systems and products successfully and in a timely manner. The
Company has implemented a plan to communicate with its customers and suppliers
on this issue in an effort to minimize any potential Year 2000 compliance
impact; however, it is not possible to guarantee their compliance.
The total cost of the program is estimated to be less than $5,000, of which none
has been spent through December 31, 1998.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issues. Nevertheless, since it is not possible to
anticipate all possible future outcomes, especially when third parties are
involved, there could be circumstances in which the Company would be unable to
take customer orders, or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date transaction records. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
16
The Company has an informal contingency plan for its applications. The Company
is working continually with the third party suppliers of software and related
services in resolving Year 2000 issues. The Company's formal contingency plans
are currently being developed in conjunction with these suppliers. Testing will
be performed and completed by mid-calendar year 1999. The Company will continue
to monitor the progress of the suppliers in the resolution of Year 2000 issues
and continue to evaluate the necessity of an independent contingency plan.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer of the financial instrument or its related country of origin.
Market risk is inherent to many non-derivative financial instruments, and
accordingly, the scope of the Company's market risk management procedures
includes all market risk sensitive financial instruments.
The Company faces two types of market risk: foreign exchange rate risk and
equity price risk.
Foreign Exchange Rate Risk. Foreign exchange rate risk arises from the
possibility that changes in foreign exchange rates will impact the value of
financial instruments. When the Company buys or sells a financial instrument
denominated in a currency other than U.S. dollars, exposure exists from a net
open currency position. The Company is then exposed to a risk that the exchange
rate may move against it. At September 30, 1998, the currency creating foreign
currency risk for the Company was the Hong Kong dollar.
Equity Price Risk. The Company is exposed to equity price risk as a consequence
of making investments in equity securities. Equity price risk results from
changes in the level or volatility of equity prices, which affect the value of
equity securities or instruments that derive their value from a particular
stock, a basket of stocks or a stock index. The Company attempts to reduce the
risk of loss inherent in its inventory of equity securities by entering into
transactions designed to mitigate the Company's market risk profile.
The Company utilizes a wide variety of market risk management methods,
including: limits for each trading activity; marking all positions to market on
a timely basis; timely profit and loss statements; and independent verification
of pricing. The Company believes that these procedures, which stress timely
communication, are the most important elements of the risk management process.
Efforts to further strengthen the Company's management of market risk are
continuous, and the enhancement of risk management systems is a priority of the
Company. This includes the development of quantitative methods, profit and loss
and variance reports, and the review and approval of pricing models.
The table below provides a comparison of the carrying amount to the fair value
of the securities owned by the Company that are classified as available-for-sale
securities.
December 31, 1998
-----------------
Carrying Amount Fair Value
--------------- ----------
Foreign Exchange Rate Risk:
Equity securities denominated in $ 439,290 $ 439,290
Hong Kong dollars
Equity Price Risk:
Equity securities* 439,290 439,290
*Includes equity securities denominated in Hong Kong dollars.
In accordance with generally accepted accounting principles, securities
classified as available-for-sale securities are marked-to-market and the
resulting unrealized gain or loss is reflected in the statement of comprehensive
income. For the year ended December 31, 1998, the Company recognized unrealized
losses of $1,048,813 on the equity securities denominated in Hong Kong dollars.
18
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 8 are attached at the
end of this Annual Report on Form 10-K. An Index to these Consolidated Financial
Statements is also included in Item 14 (a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no changes in or disagreements with accountants on accounting,
financial disclosure or other matters, which would require disclosure herein.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names and ages of all directors and executive officers of the Company are as
follows:
Name Age Position
- --------------- ----- -----------------------------------------------
Fai H. Chan 54 President, Chief Executive Officer and Director
Robert H. Trapp 44 Secretary, Treasurer and Director
Management Biographies
Fai H. Chan has been the president and a director of the Company since June 1994
and has served as the Company's Chief Executive Officer since June 1995. In
1998, Mr. Chan was appointed president and chairman of the board of directors of
eVision USA.Com, Inc., formerly known as Fronteer Financial Holdings, Ltd., a
holding company which among other things, owns a securities broker/dealer
located in Colorado. From June 1993 to the present, he has been a director of
Inter-Asia Equities, Inc., a Canadian company. Since September 1992 to the
present, he has been a director of Heng Fung Holdings Co., Ltd. ("Heng Fung"), a
public company in Hong Kong, which is listed on the Hong Kong Stock Exchange. In
1995, Mr. Chan was appointed managing director and chairman of Heng Fung, for
which he still serves. In May 1998, he was appointed a director of Global Med
Technologies, Inc. Since March 1988, he has been chairman of the board of
directors of American Pacific Bank, a bank in Oregon, and between April 1991 and
April 1993, he was the chief executive officer of said bank.
Robert H. Trapp has been the secretary and treasurer and a director of the
Company since June 1994. In May 1998, he was appointed a director of Global Med
Technologies, Inc. In 1997 and 1998, Mr. Trapp was appointed managing director
and director of eVision USA.Com, Inc., formerly known as Fronteer Financial
Holdings, Ltd. Since May 1995, Mr. Trapp has been a director of Heng Fung
Holdings Co., Ltd., a public company in Hong Kong, which is listed on the Hong
Kong Stock Exchange. Since April 1994, Mr. Trapp has been the secretary of the
Company. Since February 1995, Mr. Trapp has been a director of Inter-Asia
Equities, Inc. a Canadian company. Since July 1991, he has also been the
Canadian operational manager of Pacific Concord Holding (Canada) Ltd.,
responsible for management, marketing, and financial reporting operations of
such company to Pacific Concord Holding Ltd. of Hong Kong. Between March and
June 1991, Mr. Trapp was a securities trainee at Pacific International
Securities in Vancouver, B.C., Canada. Between September 1985 and June 1989, Mr.
Trapp served as an executive officer and a director of Inter-Asia Equities, Inc.
19
All officers of the Company are elected to serve in such capacities until the
next annual meeting of the Board of Directors of the Company and until their
successors are duly elected and qualified.
The Board of Directors met twice during the year ended December 31, 1998. No
incumbent director attended fewer than all of the meetings held by the Board of
Directors.
There are no material proceedings to which any director, officer or affiliate of
the Company, any owner of record or beneficially of more than 5% of any class of
voting securities of the Company, or any associate of any such director,
officer, affiliate of the Company or security holder is a party adverse to the
Company or any of its subsidiaries.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate of limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
arising under Section 174 of the Delaware General Corporation Law; or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise. The Company's Certificate of
Incorporation eliminates the personal liability of directors to fullest extent
permitted by Section 102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the officers
and directors of the Company for any claim arising against such persons in their
official capacities if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in Securities Act and is therefore unenforceable.
Committees of the Board of Directors
The Board of Directors has not established any committees.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, during the year ended December 31, 1998, there were
no directors, officers or more than 10% shareholders of the Company that failed
to timely file a Form 3, Form 4 or Form 5; other than Fai H.
Chan who failed to timely file a Form 5.
20
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
During the year ended December 31, 1998, Heng Fai Management, Inc., a wholly
owned subsidiary of the Company, paid $500,000 in consulting and management fees
to Tight Hold Investment Limited, a company wholly owned by Fai H. Chan, the
Company's chief executive officer.
Name and Principal Positions Year Ended Compensation Other Annual Compensation
($)
- ---------------------------- ---------- ------------ -------------------------
Fai H. Chan, President 1998 $500,000 --
CEO, and Director 1997 $500,000 --
1996 $500,000 --
Stock Option Plans
The Company currently has no stock option plans.
Option/SAR Grants in Last Year
There were no options granted during the year ended December 31, 1998.
Aggregate Option/SAR Exercises in Last Year And Year-End Options/SAR Values
No options were exercised during the year ended December 31, 1998 and there were
no unexercised options as of the end of the year ended December 31, 1998.
Employment Agreements
There are no employment agreements between the Company and its executive
officers.
Remuneration of Directors
Directors do not receive compensation for attendance at meetings of the Board of
Directors. All directors are entitled to reimbursement of reasonable travel and
lodging expenses related to attending meetings of the Board of Directors.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of June 17, 1999, certain information with
respect to stock ownership of: (i) all persons known by the Company to be
beneficial owners of five percent or more of its outstanding common stock: (ii)
each of the Company's directors and executive officers; and (iii) all directors
and executive officers as a group. Unless otherwise indicated, the beneficial
owners have sole voting and investment power over the shares of common stock
listed below.
% of Outstanding
Name and Address Number of Shares of Common stock
of Beneficial Owner(1) Beneficially Owned(1) Beneficially Owned(1)
---------------------- --------------------- ---------------------
SAR Trading Limited 13,700,000(5) 46.35%
10th Floor, Lippo Protective Tower
231-235 Gloucester Road
Wanchai, Hong Kong 040
Fai H. Chan 20,092,886(2)(4)(5) 67.98%
Lippo Protective Tower
10th Floor
231-235 Gloucester Road
Wanchai, Hong Kong 040
Robert H. Trapp 100,000 **
1700 Lincoln Street
32nd Floor
Denver, Colorado 80203
Keow Y. Chan 2,772,886(3)(4) 9.38%
Unit B, 13th Floor
Lippo, Leighton Tower
103-109 Leigton Road
Causeway Bay, Hong Kong
All Executive Officers & Directors
As a Group (2 Persons)(5) 20,192,886 68.32%
- -------------------------------
** Less than 1%
(1) Unless otherwise noted, the Company believes that all of such shares are
owned of record by each individual named as beneficial owner and that such
individual has sole voting and dispositive power with respect to the shares
of common stock owned by each of them. Such person's percentage ownership
is determined by assuming that the options or convertible securities that
are held by such person which are exercisable within 60 days have been
exercised or converted, as the case may be.
(2) Includes 5,800,000 shares owned of record by Mr. Chan. Also includes (i)
37,500 shares of common stock held by Inter-Asia Equities, Inc.
("Inter-Asia"); (ii) 37,500 shares of common stock underlying warrants held
by Inter-Asia; (iii) 258,943 shares of common stock held by Excess Pension
Fund, Inc. ("Fund"); (iv) 258,943 shares of common stock underlying
warrants held by the Fund. Mr. Chan is an officer, director and stockholder
of Inter-Asia, and a beneficial owner of the Fund. Excludes the 2,180,000
shares owned of record by Mr. Chan's wife. See Footnote (3) below.
22
(3) Includes (i) 258,943 shares of common stock held by the Fund; (ii) 258,943
shares of common stock underlying warrants held by the Fund; (iii) 37,500
shares of common stock held by Inter-Asia; and (iv) 37,500 shares of common
stock underlying warrants held by Inter-Asia. Ms. Chan is the president and
a director of Inter-Asia, and a beneficial owner of the Fund. Excludes
5,800,000 shares owned of record by Ms. Chan's husband, Fai H. Chan. See
Footnote (2) above.
(4) In the event that Mr. Chan is deemed to beneficially own all of the shares
owned of record by his spouse, Mr. Chan would be deemed to beneficially own
22,272,886 shares or approximately 75.36% of the outstanding common stock
of the Company.
(5) SAR Trading Limited is owned 100% by Mr. Fai H. Chan. These 13,700,000
shares are beneficially owned by Mr. Chan.
There are no agreements or other arrangements or understandings known to the
Company concerning the voting of the Common Stock of the Company or otherwise
concerning control of the Company which are not disclosed herein. There are no
preemptive rights applicable to the Company's securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company maintains deposits in accounts at American Pacific Bank. Fai H. Chan
(an officer, director and stockholder of the Company) is an officer and/or
director of such bank.
The Company owns 48,535,276 shares of common stock of Heng Fung Holdings Company
Limited. Messrs. Chan, and Trapp (officers, directors and/or stockholders of the
Company) are officers, directors and /or stockholders of such company.
At December 31, 1998 and 1997, the second mortgage of $77,579 and related
interest payable of $25,368 and $38,623, respectively, were payable to the
Silverstein Foundation, Inc., a Panama company, in which Mr. Fai H. Chan's
children have beneficial ownership interests. The related interest expense was
$8,269 in 1998, $7,774 in 1997 and $8,947 in 1996.
On January 18, 1999, the Company entered into an agreement with SAR Trading
Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of
its interests in the majority of its subsidiaries for approximately $4,838,000
in the form of the assumption of certain liabilities. In consideration of the
assumption of liabilities, the Company agreed to issue two notes payable to SAR
in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is immediately
convertible into 20,000,000 common shares of the Company. The $3,838,000 note
can be converted into shares of common stock of the Company, in minimum
increments of $250,000 each, at the average 15 day trading price at the option
of the Company by giving seven trading days notice in writing to SAR. SAR is
owned 100% by Fai H. Chan. The agreement is subject to shareholder approval.
On February 5, 1999, 13,700,000 shares of the Company's common stock were issued
to SAR in exchange for forgiveness of debt of $685,000. SAR is wholly-owned by
Mr. Fai H. Chan.
Heng Fai Management, Inc., a wholly owned subsidiary of the Company, entered
into a consultation and management agreement with Tight Hold Investment Limited,
a company wholly owned by Fai H. Chan, president and chief executive officer of
the Company. The term of this agreement is for ten years having commenced
November 1, 1996 and ending October 31, 2006. The remuneration the Company shall
pay for services rendered pursuant to this agreement is as follows: (i) the sum
23
of $500,000 per year for the duration of the agreement, a rate of $41,667 per
month; and (ii) upon the Company meeting NASDAQ National Market System
("NASDAQ") requirements of having $4,000,000 in net tangible assets, and
obtaining the other requirements which allow the Company's stock to be
marginable on NASDAQ and having declared at least a minimum $0.10 per share
earning and $0.05 dividend to common shareholders, the fee shall increase to
$1,000,000 per year for the duration of the agreement, a rate of $83,333 per
month. This agreement was terminated during June 1999.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Income and Comprehensive Income
for each of the three years in the period ended December
31, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the three years in the period ended December
31, 1998 F-8
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 F-9
Notes to Consolidated Financial Statements F-11
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements and
Notes thereto.
(a)(2) Financial Statement Schedules. None.
(a)(3) Exhibits. See "EXHIBIT INDEX" on page 22.
(b) Current Reports on Form 8-K
The Company had not filed any reports on Form 8-K during the last quarter of the
year ended December 31, 1998.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POWERSOFT TECHNOLOGIES, INC.
By: /s/ Fai H. Chan
------------------------------------
Fai H. Chan, President
Date: July 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: July 29, 1999 By: /s/ Fai H. Chan
------------------------------------------------
Fai H. Chan, President, CEO & Director
Date: July 29, 1999 By: /s/ Robert H. Trapp
------------------------------------------------
Robert H. Trapp, Secretary, Treasurer & Director
25
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
Report and Financial Statements
For the year ended December 31, 1998
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
REPORT AND FINANCIAL STATEMENTS
For the Year Ended December 31, 1998
CONTENTS PAGES
Report of Independent Auditors F - 3
Consolidated Balance Sheets F - 4
Consolidated Statements of Income and Comprehensive Income F - 6
Consolidated Statements of Shareholders' Deficit F - 8
Consolidated Statements of Cash Flows F - 9
Notes to the Consolidated Financial Statements F - 11
F - 2
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholders of
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
We have audited the accompanying consolidated balance sheets of Powersoft
Technologies, Inc. (the "Company") and its subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income and comprehensive
income, shareholders' deficit and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Powersoft Technologies, Inc. and
its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations and minimal
net tangible assets raise substantial doubt as to its ability to continue as a
going concern, however, the principal shareholder has committed to continue
providing financial support. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Deloitte Touche Tohmatsu
Hong Kong
April 16, 1999 (except as to note 16(a) as to which the date is June 18, 1999)
F - 3
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
As of December 31,
ASSETS 1998 1997
---- ----
Current assets:
Cash and cash equivalents ............................. $ 44,949 $ 36,173
Available-for-sale securities (note 5) ................ 439,290 1,507,345
Accounts receivable, trade, less allowance for doubtful
accounts of $0 in 1998 and 1997 ..................... 29,830 7,521
Prepaid and other current assets ...................... 24,260 32,153
Amounts receivable from related parties (note 9) ...... 15,632 18,950
---------- ----------
Total current assets .................................. 553,961 1,602,142
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 6) .............. 661,805 785,920
---------- ----------
Total assets ............................................. $1,215,766 $2,388,062
========== ==========
See accompanying notes to the consolidated financial statements.
F - 4
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED BALANCE SHEETS-continued
(United States Dollars)
As of December 31,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1998 1997
---- ----
Current liabilities:
Mortgage loans payable - current portion (note 10) ................ $ 109,159 $ 115,251
Accounts payable .................................................. 96,967 48,701
Margin loan payable (note 8) ...................................... 3,136,264 3,058,295
Accrued expenses and other liabilities ............................ 80,091 154,756
Amounts payable to related parties (note 9) ....................... 1,861,216 904,756
----------- -----------
Total current liabilities: ........................................ 5,283,697 4,281,759
----------- -----------
Long-term liabilities:
Mortgage loans payable (note 10) .................................. 710,277 837,966
----------- -----------
Commitments and contingencies (note 15)
Shareholders' deficit:
Preferred stock, $5 par value, 25,000,000 shares
authorized; unissued ............................................ -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; issued and outstanding 1998 and 1997;
15,559,542 shares ............................................... 155,595 155,595
Additional paid-in capital ........................................ 5,385,296 5,385,296
Accumulated deficit ............................................... (6,981,436) (5,904,303)
Unrealized loss on available-for-sale securities (note 5) ......... (3,356,080) (2,307,267)
Cumulative exchange adjustments ................................... 18,417 1,516
----------- -----------
(4,778,208) (2,669,163)
Common stock issued for consulting services to be
received (note 7) ............................................... -- (62,500)
----------- -----------
Total shareholders' deficit ....................................... (4,778,208) (2,731,663)
----------- -----------
Total liabilities and shareholders' deficit .......................... $ 1,215,766 $ 2,388,062
=========== ===========
See accompanying notes to the consolidated financial statements.
F - 5
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
Revenues:
Rental income ............................................ $ 307,327 $ 346,528 $ 336,644
Interest ................................................. 1,011 515 1,490
Investment income - securities ........................... -- 210,380 56,552
Others ................................................... 12,292 14,498 34,172
------------ ------------ ------------
Total revenues .............................................. 320,630 571,921 428,858
------------ ------------ ------------
Expenses:
Depreciation ............................................. 35,186 41,161 41,815
Legal and professional fees .............................. 31,620 149,900 82,831
Consulting fees (note 7) ................................. 62,500 272,250 1,368,567
Consulting fees paid to a related company
(note 9) .............................................. 500,000 500,000 500,000
Interest on long-term debt ............................... -- -- 85,990
Interest on short-term debt .............................. 492,804 309,201 35,446
Investment banking fees .................................. -- 164,252 --
Utilities ................................................ 47,806 23,522 48,924
Foreign exchange (gain) loss ............................. (5) (1,695) 10,477
Land lease ............................................... 71,115 80,321 80,321
Real estate management fees .............................. 21,625 36,784 13,056
Salaries ................................................. -- 4,527 4,358
Traveling ................................................ -- 17,717 40,841
Other operating and administrative expenses .............. 135,112 191,399 177,964
------------ ------------ ------------
Total expenses .............................................. 1,397,763 1,789,339 2,490,590
------------ ------------ ------------
Loss from continuing operations ............................. (1,077,133) (1,217,418) (2,061,732)
------------ ------------ ------------
(Continued)
See accompanying notes to the consolidated financial statements.
F - 6
POWERSOFT TECHNOLOGIES, INC.
(Formely known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME-continued
(United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
Discontinued operations (note 3)
Loss from Cangzhou cement ................................ $ -- $ (157,117) $ (62,487)
Gain on disposal of Cangzhou cement ...................... -- 148,775 --
Loss from Wuhan .......................................... -- (248,210) (241,208)
Gain on reversal of Wuhan acquisition .................... -- 307,442 --
Share of loss for the investment in Duck Farm ............ -- (107,229) --
Loss on disposal of the investment in Duck Farm .......... -- (194,095) --
------------ ------------ ------------
Loss from discontinued operations ........................... -- (250,434) (303,695)
------------ ------------ ------------
Loss before income taxes .................................... (1,077,133) (1,467,852) (2,365,427)
Provision for income taxes (note 12) ........................ -- -- --
------------ ------------ ------------
Loss before minority interest ............................... (1,077,133) (1,467,852) (2,365,427)
Minority interest from discontinued operations .............. -- 74,463 77,099
------------ ------------ ------------
Net loss .................................................... (1,077,133) (1,393,389) (2,288,328)
------------ ------------ ------------
Other comprehensive income (loss), net of tax:
Foreign exchange adjustments ............................. 16,901 (5,452) --
Unrealized loss on available-for-sale securities ......... (1,048,813) (2,228,442) (34,884)
------------ ------------ ------------
Other comprehensive loss .................................... (1,031,912) (2,233,894) (34,884)
------------ ------------ ------------
Comprehensive loss .......................................... $ (2,109,045) $ (3,627,283) $ (2,323,212)
============ ============ ============
Loss per share (basic and diluted):
From continuing operations ............................... $ (0.07) $ (0.08) $ (0.18)
Effect of discontinued operations ........................ -- (0.01) (0.02)
------------ ------------ ------------
Net loss per share ....................................... $ (0.07) $ (0.09) $ (0.20)
============ ============ ============
Weighted average number of shares of
common stock outstanding ................................. 15,559,542 14,873,091 11,223,288
============ ============ ============
See accompanying notes to the consolidated financial statements.
F - 7
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(United States Dollars)
Accumulated other
comprehensive loss
----------------------------
Unrealized Common
Common stock loss on stock issued
---------------------- Additional available for Cumulative for consulting
Number paid-in Accumulated sale exchange services to be
of shares Amount capital deficit securities adjustments received Total
--------- ------ ---------- ----------- ------------ ----------- ------------- -----
At December 31, 1995 .... 10,859,542 $ 108,595 $ 2,812,546 $(2,222,586) $ (43,941) $ 6,968 $ (703,567) $ (41,985)
Issued to effect
a consulting
agreement
(note 11a) ........... 400,000 4,000 895,750 -- -- -- (899,750) --
Amortization of
consulting fees ...... -- -- -- -- -- -- 1,368,567 1,368,567
Issued for
acquisition of a
subsidiary
(note 11b) ........... 727,272 7,273 992,727 -- -- -- -- 1,000,000
Net loss ................ -- -- -- (2,288,328) -- -- -- (2,288,328)
Other comprehensive loss:
Unrealized loss
on securities
available-for-sale.. -- -- -- -- (34,884) -- -- (34,884)
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1996 .... 11,986,814 119,868 4,701,023 (4,510,914) (78,825) 6,968 (234,750) 3,370
Private placements
(note 11) ............ 1,700,000 17,000 1,003,000 -- -- -- -- 1,020,000
Private placements
(note 11) ............ 2,500,000 25,000 575,000 -- -- -- -- 600,000
Issue to effect a
consulting
agreement (note 11e).. 100,000 1,000 99,000 -- -- -- (100,000) --
Amortization of
consulting fees ...... -- -- -- -- -- -- 272,250 272,250
Redemption to reverse
the purchase
of a subsidiary
(note 11f) ........... (727,272) (7,273) (992,727) -- -- (5,452) -- (1,005,452)
Net loss ................ -- -- -- (1,393,389) -- -- -- (1,393,389)
Other comprehensive loss:
Unrealized loss
on securities
available-for-sale.. -- -- -- -- (2,228,442) -- -- (2,228,442)
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1997 .... 15,559,542 155,595 5,385,296 (5,904,303) (2,307,267) 1,516 (62,500) (2,731,663)
Amortization of
consulting fees ....... -- -- -- -- -- -- 62,500 62,500
Net loss ................ -- -- -- (1,077,133) -- -- -- (1,077,133)
Other comprehensive income
(loss):
Unrealized loss
on securities
available-for-sale.. -- -- -- -- (1,048,813) -- -- (1,048,813)
Foreign exchange
translation
adjustment ......... -- -- -- -- -- 16,901 -- 16,901
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1998 .... 15,559,542 $ 155,595 $ 5,385,296 $(6,981,436) $(3,356,080) $ 18,417 $ -- $(4,778,208)
========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes to the consolidated financial statements.
F - 8
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
Cash flow from operating activities:
Net loss ...................................................... $(1,077,133) $(1,393,389) $(2,288,328)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest ......................................... -- (74,463) (77,099)
Depreciation and amortization ............................. 35,186 208,214 194,939
Consulting fees ........................................... 562,500 772,250 1,868,567
Allowance for doubtful accounts ........................... -- -- 70,258
Available-for-sale securities written off ................. 19,242 -- --
Provision for stock obsolescence .......................... -- -- 52,322
Gain on disposal of a subsidiary .......................... -- (148,775) --
Gain on the reversal of the purchase
of a subsidiary ......................................... -- (307,442) --
Loss on investment in Duck Farm ........................... -- 301,324 --
Changes in working capital components:
Accounts receivable ..................................... (22,309) (3,033,177) (1,021,123)
Inventories ............................................. -- 2,364,197 (1,935,180)
Prepaid and other current assets ........................ 29,193 (799,162) 4,851
Amounts receivable from related parties ................. 3,318 (1,653,988) (124,800)
Value added taxes recoverable ........................... -- (177,674) (611,790)
Accounts payable ........................................ 48,266 649,881 576,792
Bills payable ........................................... -- (481,928) 722,892
Accrued expenses and other liabilities .................. (74,665) 414,288 206,679
Foreign exchange difference ............................. (6,664) -- --
Amounts payable to related parties ...................... 456,460 (703,752) 487,258
Prepaid rental .......................................... -- 28,916 28,683
----------- ----------- -----------
Net cash used in operating activities ......................... (26,606) (4,034,680) (1,845,079)
----------- ----------- -----------
Cash flow from investing activities:
Purchase of available-for-sale securities ..................... -- (6,098,426) (264,688)
Proceeds from sale of available-for-sale securities ........... -- 3,044,970 28,308
Purchase of property, plant and equipment ..................... -- (91,414) (158,987)
Cash acquired on purchase of subsidiary (note 4) .............. -- -- 21,940
Cash given up on the reversal of the purchase
of a subsidiary ............................................. -- (142,973) --
Proceeds from disposal of a subsidiary ........................ -- 8,657 --
----------- ----------- -----------
Net cash used in investing activities ............................ -- (3,279,186) (373,427)
----------- ----------- -----------
(Continued)
See accompanying notes to the consolidated financial statements.
F - 9
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
(United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
Cash flow from financing activities:
Common stock issued for cash .................................. $ -- $ 1,620,000 $ --
Increase in margin loan payable ............................... 77,969 2,569,102 243,081
Repayment of margin loan ...................................... -- -- (28,308)
Increase in short-term borrowings ............................. -- 3,056,287 1,092,930
Repayment of mortgage loans ................................... (21,287) (20,446) (18,770)
Repayment in long-term payable ................................ -- (45,163) (2,671)
Advance from a minority shareholder ........................... -- -- 1,047,502
----------- ----------- -----------
Net cash provided by financing activities ........................ 56,682 7,179,780 2,333,764
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............. 30,076 (134,086) 115,258
Cash and cash equivalents at beginning of year ................... 36,173 170,259 55,001
----------- ----------- -----------
Cash and cash equivalents at end of the year ..................... $ 66,249 $ 36,173 $ 170,259
=========== =========== ===========
Cash paid during the year for:
Interest ...................................................... $ 458,171 $ 301,972 $ 184,078
=========== =========== ===========
Non-cash financing activities:
Advances from a related party for investment
in Duck Farm (note 3) ....................................... $ -- $ 301,324 $ --
=========== =========== ===========
Issuance of common stock for consulting services .............. $ -- $ 100,000 $ 1,368,567
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
F - 10
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
On March 23, 1998, the Company changed its name from Heng Fai China
Industries, Inc. to Powersoft Technologies, Inc. (the Company).
On December 31, 1998, the Company and its subsidiaries' principal activity
is the operation of a rental property in North Vancouver, British Columbia
in Canada. Changes in the property market in that location could have a
material impact on the Company. See Note 13 for information on the
geographic location of the Company's assets.
At December 31, 1998, details of the subsidiary companies, all of which are
wholly-owned, are as follows:
Place of
Incorporation/
Establishment
---------------------
Name of subsidiary Principal activities
---------------------------------------------- --------------------- ---------------------------------
Heng Fai China & Asia Industries Limited Hong Kong Investment holding
Heng Fai China Industries Acquisition Limited Hong Kong Inactive
Heng Fai China Industries Limited Hong Kong Investment holding
Greatly Hong Kong Limited Hong Kong Investment holding
Worldwide Container Company Limited Hong Kong Investment holding trading
Vancouver Hong Kong Properties Ltd. Canada Property investment
and management
America & China Business Development Inc. Canada Inactive
Heng Fai Management Inc. British Virgin Provision of management
Islands Services
The Company holds certain investments in marketable equity securities,
which are carried at fair value. Future changes in the market value of
these securities could materially affect the Company's financial position.
2. GOING CONCERN
These consolidated financial statements have been prepared on the going
concern basis of accounting which assumes the Company will realize its
assets and discharge its liabilities in the normal course of business. The
Company is currently operating at a loss and has minimal net tangible
assets. Should the Company be unable to continue as a going concern it may
be required to realize its assets and settle its liabilities at amounts
substantially different from the current carrying values.
F - 11
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
3. GOING CONCERN-continued
The Company's ability to continue as a going concern is dependent on the
continued financial support of its principal shareholder, Fai H. Chan, who
has signed a letter of financial support to the Company.
ACQUISITIONS, REVERSAL AND DISPOSAL
During 1996 and 1995 the Company made two acquisitions both of which have
either been reversed or disposed of in 1997. The acquisitions were
accounted for as a purchase and their operating results were included in
the consolidated statements of income from their respective dates of
acquisition.
On September 4, 1996, through a wholly-owned subsidiary, the Company
acquired a 70% interest in Wuhan Monkey King Container Co., Ltd. ("Wuhan")
in exchange for 727,272 shares of the Company's restricted common stock. No
goodwill arose on the acquisition. Wuhan is a joint venture incorporated in
the People's Republic of China ("PRC") which was formed to engage in the
design, manufacture, lease and repair of standard and non-standard
containers and related steel structure products.
As a result of the unsatisfactory performance of Wuhan in both 1996 and
1997, the Company effected an agreement on December 29, 1997 to reverse the
acquisition by returning a 70% interest in Wuhan to redeem the 727,272
shares of restricted common stock previously issued for the acquisition.
The 1997 results of Wuhan have been disclosed under discontinued operations
and the comparatives have been restated accordingly. In 1998, the change in
ownership in Wuhan had been approved by the relevant government authorities
in PRC.
Revenues from the discontinued operation in Wuhan were $2,934,871 and
$1,082,317 in 1997 and 1996, respectively.
On January 9, 1995, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Heng Fai China & Asia Industries Limited ("Heng Fai Asia") in
exchange for nominal consideration. Heng Fai Asia through its wholly-owned
subsidiaries had various options to acquire interests in various lease
interests or operating joint ventures in the PRC, but otherwise had no
material assets and liabilities or operations at the time of acquisition.
F - 12
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
3. ACQUISITIONS, REVERSAL AND DISPOSAL-continued
Heng Fai Asia, through its wholly-owned subsidiary, Cangzhou Min You Cement
Co., Ltd. (the "Cangzhou Cement") formed in January 1995 exercised its
option to enter into a lease, for a period of five years commencing January
1, 1995, of a production line at the Hebei Cangzhou City Chemical
Corporation Factory (the "Cangzhou Factory"). Cangzhou Cement was entitled
to lease the production line for five years for a rental of RMB1.2 million
($144,288) payable through expenditures, which were made in 1995, to
renovate and modernize the Cangzhou Factory.
On December 10, 1997, the Company disposed of a 75% and a 6% interest in
the Cangzhou Cement to the Chinese joint venture partner and an
unaffiliated company for a consideration of $nil and $8,657, respectively.
At December 31, 1997, the Company's interest in Cangzhou Cement has been
reduced from 100% to 19% and full provision was made against the remaining
cost of investment in the Cangzhou Cement. The change in ownership in
Cangzhou Cement has been approved by the relevant government authorities in
PRC.
Revenues from the discontinued operation in Cangzhou Cement were $306,398
and $540,191 in 1997 and 1996, respectively.
Heng Fai Asia's other options lapsed in 1995.
In January 1997, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Greatly Hong Kong Limited ("Greatly HK") in exchange for nominal
consideration. Greatly HK had a 25% interest in Hebei Cherry Valley Duck
Ltd. ("Duck Farm"), a cooperative joint venture established in the PRC
which was engaged in the management and operation of a duck farm in PRC.
The investment was wholly financed by an interest free, short-term advance
of RMB2,500,000 from Fai H. Chan. Other than the investment in the Duck
Farm and the advance from Fai H. Chan, Greatly HK had no other material
assets and liabilities or operations at the time of acquisition.
As a result of the unsatisfactory performance of the Duck Farm, Greatly HK
effected an agreement in December 1997 to dispose of its 25% interest in
the Duck Farm at a consideration of $nil. In 1998, the change in ownership
in the Duck Farm was approved by the relevant government authorities in
PRC.
The share of 1997 results and the loss on disposal of the Duck Farm have
been disclosed under discontinued operations.
F - 13
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
3. ACQUISITIONS, REVERSAL AND DISPOSAL-continued
On March 3, 1997, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Heng Fai China Industries Acquisition Limited ("Heng Fai
Acquisition") in exchange for nominal consideration. Heng Fai Acquisition
had an option to form a cooperative joint venture in the PRC, but otherwise
had no material assets and liabilities or operations at the time of
acquisition.
Heng Fai Acquisition had entered into a conditional agreement (the
"Agreement") with an unaffiliated party in PRC, (the "PRC Party") to
establish a joint venture, in Zhangjiagang Free Trade Zone, PRC. However,
the Agreement was not completed and the registration of the joint venture
was canceled during 1997.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States. The following sets forth the significant accounting principles
utilized in the preparation of the consolidated financial statements:
Principles of consolidation - The consolidated financial statements of
Powersoft Technologies, Inc. include the assets, liabilities, revenues and
expenses of the Company and all its subsidiaries. All material intercompany
transactions and balances have been eliminated.
Cash and cash equivalents - The Company's cash and cash equivalents include
cash on hand and short-term bank deposits, with original maturities of
three months or less.
The following supplemental schedule summarizes the fair value of assets
acquired, cash paid net of cash acquired, common stock issued and the
liabilities assumed in conjunction with the acquisition of equity interests
in subsidiaries in 1996:
Fair value of non-cash assets acquired $ 5,083,943
Cash acquired 21,940
Common stock issued (100,000)
-----------
Liabilities assumed $ 4,105,883
===========
Investment securities - The Company has classified the marketable equity
securities it holds as available-for-sale. Accordingly, pursuant to
Statement of Financial Accounting Standard No. 115 the securities are
measured at fair value, with unrealized gains and losses, net of applicable
taxes, reported as a separate component of equity.
F - 14
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued
Property, plant and equipment - Properties, plant and equipment are stated
at cost. Depreciation and amortization is based on the respective estimated
useful lives as calculated on the following bases:
Building in Canada 5% declining balance method
Leasehold land Amortized over the term of the lease,
which expires on May 31, 2032 using
the straight line method.
Furniture and equipment 10% to 20% straight line method
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the accounts and any resulting gain or
loss is included in income.
Foreign currency translation - Financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at
each balance sheet date for assets and liabilities and a weighted average
exchange rate for each period for revenue and expenses. Where the local
currency is the functional currency, translation adjustments are recorded
as a separate component of shareholders' (deficit) equity.
Revenues recognition - Rental income is recognized on a straight-line basis
over the periods of the leases. Investment income from the sale of
securities is recognized on the transaction date when title of the
securities has passed. Dividend income from investments is recognized when
shareholders' rights to receive payment have been established.
Income taxes - Certain items are treated differently for financial
reporting purposes than for income tax purposes. Pursuant to the provision
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", deferred tax is provided, under the liability method, for
the resulting temporary differences between the financial reporting and tax
bases of assets and liabilities, using the currently enacted tax rates.
Loss per common share - Basic earnings (loss) per common share has been
calculated based upon the net earnings (loss) available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share
would not be different than basic earnings (loss) per common share due to
the fact that including the potential common shares would result in
antidilution as a result of the loss from continuing operations.
F - 15
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Effects of recent accounting standards - In 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) No.130, "Reporting
Comprehensive Income", SFAS No.131, "Disclosures about Segments of an
Enterprise and Related Information" and SFAS No.132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits".
SFAS No. 130 requires that an enterprise reports, by major components and
as a single total, the change in its net assets during the period from
non-owner sources. The Company has presented its comprehensive income
(loss) in the consolidated statements of income.
SFAS No. 131, which superseded SFAS No. 14, "Financial Reporting for
Segments of Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not require any changes to the
Company's existing financial statement disclosures.
SFAS No.132 amends the disclosure requirements for pensions and other
postretirement benefits. The adoption of SFAS No.132 had no significant
impact on the Company's current financial statement disclosures.
New accounting standards not yet adopted - The Financial Accounting
Standards Board has issued a new standard SFAS No.133, "Accounting for
Derivative Instruments and Hedging Activities." Management has not yet
completed the analysis of the impact this would have on the financial
statements of the Company.
F - 16
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
5. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities were as
follows:
As of December 31,
Corporate equity securities: 1998 1997
---- ----
Cost $ 3,795,370 $ 3,814,612
Less: Gross unrealized losses (3,356,080) (2,307,267)
------------ ----------
Estimated fair value $ 439,290 $ 1,507,345
============ ==========
Carrying value $ 439,290 $ 1,507,345
============ ==========
All investment securities are pledged to secure the Company's margin loan
payable (See note 8).
Included in the above securities are 48,535,276 shares at December 31, 1998
(1997: 48,535,276 shares) representing 3.9% (1997: 3.9%) of the outstanding
common stock of Heng Fung Holdings Company Limited, ("Heng Fung"). These
securities were acquired in 1997 at a cost of $3,814,612 and had a carrying
value of $439,290 at December 31, 1998 and $1,507,345 at December 31, 1997.
Fai H. Chan and Robert H. Trapp, directors of Heng Fung, are also officers,
directors and/or shareholders of the Company.
The investment securities held by the Company are not subject to any
contractual or statutory resale restrictions and any portion of these
securities can be reasonably expected to qualify for sale within one year.
F - 17
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
As of December 31,
1998 1997
---- ----
Buildings $ 639,718 $ 722,538
Leasehold land 514,334 580,922
Furniture and equipment 11,347 11,347
---------- ----------
Total 1,165,399 1,314,807
Less: Accumulated depreciation and amortization (503,594) (528,887)
---------- ----------
$ 661,805 $ 785,920
========== ==========
7. DEFERRED EXPENDITURE
(a) In June 1995, the Company entered into a consulting agreement with a
previously unaffiliated party pursuant to which it received various
investor relations and financial advisory services. The consulting
agreement had a term of 12 months, subject to earlier termination
thereof or renewal for subsequent periods. Pursuant to the terms of
the agreement, the Company: (a) in June 1995, issued to the consultant
an aggregate of 260,000 shares of common stock and (b) was obligated
to issue to the consultant 20,000 shares of common stock each month
during the term of the agreement.
The unamortized portion of the amount recorded for the 260,000 shares
of common stock initially issued brought forward from 1995 of $703,567
was fully amortized in 1996 and recognized as consulting fees.
During 1996, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement in (b) above. The
value attributable to the 100,000 shares of common stock issued of
$581,000 was charged to the statement of income in 1996 and recognized
as consulting fees.
F - 18
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
7. DEFERRED EXPENDITURE-continued
(b) In September 1996, the Company entered into a consulting agreement
with another previously unaffiliated party pursuant to which it
received various investor relations and financial advisory services.
The consulting agreement had a term of 12 months, subject to earlier
termination thereof or renewal for subsequent periods. Pursuant to the
terms of the agreement, the Company issued an aggregate of 300,000
shares of common stock to the consultant in September 1996. The value
attributable to the 300,000 shares of common stock issued was
$319,500, which had been capitalized and was amortized over the 12
months term of the consulting agreement.
The unamortized portion of the amount recorded for the 300,000 shares
of common stock initially issued brought forward from 1996 of $234,750
was fully amortized in 1997 and recognized as consulting fees.
(c) In August 1997, the Company entered into a consulting agreement with a
previously unaffiliated party pursuant to which it received various
investor relations and financial advisory services. The consulting
agreement had a term of 12 months, subject to earlier termination
thereof or renewal for subsequent periods. Pursuant to the terms of
the agreement, the Company was obligated to issue 100,000 shares of
common stock to the consultant.
During 1997, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement above. The value
attributable to the 100,000 shares of common stock issued was
$100,000, which has been capitalized and was being amortized over the
12-month term of the consulting agreement. The unamortized portion of
the amount recorded for the 100,000 shares of common stock issued is
presented as a reduction of shareholders' equity.
During 1998, the unamortized portion of the amount recorded for the
62,500 shares of common stock issued brought forward from 1997 was
fully amortized and recognized as consulting fees.
8. MARGIN LOAN PAYABLE
The margin loan payable is collateralized by the Company's investment
securities with a carrying value of $439,290 (1997: $1,507,345). The loan
is payable on demand and bears interest at Hong Kong best lending rate
(12.5% at December 31, 1998) plus 3.5% per annum.
F - 19
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
9. RELATED PARTY TRANSACTIONS
At the balance sheet date the Company had the following balances with
related parties, which are interest-free, payable on demand and unsecured
unless otherwise stated:
As of December 31,
1998 1997
---- ----
Amounts receivable from:
Parties related to certain directors $ 15,632 $ 18,950
======== ==========
Amounts payable to:
Certain directors $ 901,097 $ 620,067
Parties related to certain directors 960,119 284,689
--------- ----------
$ 1,861,216 $ 904,756
========= ==========
In addition at December 31, 1998 and 1997, the second mortgage of $77,579
and related interest payable of $25,368 and $38,623, respectively, are
payable to the Silverstein Foundation, Inc., a Panama company, in which Mr.
Fai H. Chan's children have beneficial ownership interests. The related
interest expense was $8,269 in 1998, $7,774 in 1997 and $8,947 in 1996.
On November 1, 1996, the Company entered into a 10 year consulting and
managerial agreement with Tight Hold Investment Limited ("Tight Hold"), a
company in which Fai H. Chan has a beneficial ownership interest. According
to the consulting and managerial agreement, Tight Hold shall provide
consulting and managerial services to the Company in return for an annual
consulting fee of $500,000. Consulting fees paid to Tight Hold during years
ended December 31, 1998, 1997 an 1996 were $500,000, $500,000 and $500,000,
respectively.
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of
common stock at $0.60 per share to Fai H. Chan (1,300,000 shares), Ronald
M. Lau (100,000 shares), Robert H. Trapp (100,000 shares) and Keow Y. Chan
(200,000 shares) pursuant to private placements for aggregate proceeds of
$1,020,000. Except for Keow Y. Chan who is Fai H. Chan's wife, all of the
above parties were directors of the Company at that time. (See note 11
(c)).
F - 20
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
9. RELATED PARTY TRANSACTIONS-continued
On June 25, 1997, the Company issued 2,500,000 shares of common stock at
$0.24 per share to Fai H. Chan pursuant to a private placement for proceeds
of $600,000. (See note 11 (d)).
The Company maintains deposits in accounts at American Pacific Bank and Fai
H. Chan is an officer and a director of such bank.
10. MORTGAGE LOANS PAYABLE
As of December 31,
1998 1997
---- ----
First mortgage, principal due monthly through
June 15, 2003 with fixed interest at 6.70% $ 741,857 $ 865,594
Second mortgage, principal payable on demand
with interest at Canadian prime (6.00% as at
December 31, 1998) plus 4% 77,579 87,623
-------- --------
819,436 953,217
Less: current portion (109,159) (115,251)
-------- --------
$ 710,277 $ 837,966
======== ========
The mortgage loans are denominated in Canadian dollars. The maturities of
the mortgage loans as of December 31, 1999 are as follows:
1999 $ 109,159
2000 33,596
2001 36,019
2002 38,474
2003 602,188
---------
$ 819,436
=========
The Company has pledged property with a net book value of $652,560 (1997:
$775,834) at December 31, 1998 to secure the mortgage loans.
F - 21
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
11. CAPITAL STOCK
During the three years ended December 31, 1998 there were several changes
of the Company's capital as set forth below:
In 1996,
a) the Company issued 100,000 and 300,000 shares of common stock at $5.81
and $1.0625, respectively, pursuant to consulting agreements (See
notes 7 (a) and (b)).
b) the Company issued 727,272 shares of common stock at $1.375 to acquire
a 70% interest in a subsidiary (See note 3).
In 1997,
c) the Company issued 1,700,000 shares of common stock to related parties
at $0.60 per share pursuant to private placements for proceeds of
$1,020,000. (See note 9)
d) the Company issued 2,500,000 shares of common stock to Fai H. Chan at
$0.24 per share pursuant to a private placement for proceeds of
$600,000. (See note 9)
e) the Company issued 100,000 shares of common stock at $1.00 per share
pursuant to a consulting agreement (see note 7(c)).
f) the Company redeemed 727,272 shares of common stock at $1.375 to
reverse the purchase of a 70% interest in a subsidiary (See note 3).
There were no transactions in the Company's capital during 1998.
As of December 31, 1998, there were also outstanding warrants to purchase
an aggregate of 296,443 shares of common stock, at an exercise price of
$3.20 per share through September 2, 1999. No warrants were issued or
exercised during 1998.
F - 22
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
12. INCOME TAXES
No provision for income taxes has been made as the Company and its
subsidiaries had losses for all years presented.
At December 31, 1998 certain of its subsidiaries had operating tax loss
carry forwards for income tax purposes, which may be applied to reduce
future taxable income of the same company. At December 31, 1998 there were
tax loss carryforwards in Hong Kong Special Administrative Region ("Hong
Kong") of approximately $455,000 with no expiration date.
The Company has established a valuation allowance for the entire amount of
these losses. There were no other material temporary differences.
The Company has not filed corporate income tax returns in the United States
for the periods ended June 30, 1996, June 30, 1997, June 30, 1998 and
December 31, 1998. The returns are in the process of being completed and
will be filed as soon as possible. The Company does not anticipate
significant penalties, taxes or interest.
F - 23
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
13. SEGMENT INFORMATION
Rental Investment
For the year ended December 31, 1998 Income income Consolidated
- ------------------------------------ ------ ---------- ------------
Revenues .................................................... $ 307,327 $ 13,303 $ 320,630
----------- ----------- -----------
Income (loss) from operations ............................... 80,714 (25,154) 55,560
General corporate expenses .................................. (639,889)
Interest Expense ............................................ (492,804)
-----------
Loss from continuing operations ............................. (1,077,133)
-----------
Discontinued operations:
Cement ................................................... --
Containers ...............................................
Investment in Duck Farm .................................. --
Loss from discontinued operations ........................... --
-----------
Loss before income taxes .................................... $(1,077,133)
===========
Identifiable assets:
Continuing operations .................................... $ 703,003 $ 474,435 $ 1,177,438
Discontinued operations:
Cement ................................................ --
Containers ............................................ --
Investment in Duck Farm ............................... --
-----------
1,177,438
Corporate assets ......................................... 38,328
-----------
$ 1,215,766
===========
Supplemental information
Depreciation ............................................. $ 34,346 $ 840 $ 35,186
=========== =========== ===========
Capital expenditures ..................................... $ -- $ -- $ --
=========== =========== ===========
F - 24
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
13. SEGMENT INFORMATION - continued
Rental Investment
For the year ended December 31, 1997 Income income Consolidated
- ------------------------------------ ------ ---------- ------------
Revenues .................................................... $ 346,528 $ 225,393 $ 571,921
----------- ----------- -----------
Income (loss) from operations ............................... 116,404 138,794 255,198
General corporate expenses .................................. (1,163,415)
Interest Expense ............................................ (309,201)
-----------
Loss from continuing operations ............................. (1,217,418)
-----------
Discontinued operations:
Cement ................................................... (8,342)
Containers ............................................... 59,232
Investment in Duck Farm .................................. (301,324
-----------
Loss from discontinued operations ........................... (250,434)
-----------
Loss before income taxes .................................... (1,467,852)
===========
Identifiable assets:
Continuing operations .................................... $ 803,754 $ 1,531,620 $ 2,335,374
Discontinued operations:
Cement ................................................ --
Containers ............................................ --
Investment in Duck Farm ............................... --
-----------
2,335,374
Corporate assets ......................................... 52,688
-----------
$ 2,388,062
===========
Supplemental information
Depreciation ............................................. $ 40,320 $ 841 $ 41,161
=========== =========== ===========
Capital expenditures ..................................... $ -- $ -- $ --
=========== =========== ===========
F - 25
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
13. SEGMENT INFORMATION - continued
Rental Investment
For the year ended December 31, 1996 Income income Consolidated
- ------------------------------------ ------ ---------- ------------
Revenues .................................................... $ 336,644 $ 92,2143 $ 428,858
----------- ----------- -----------
Income (loss) from operations ............................... 85,883 (59,955) 25,928
General corporate expenses .................................. (1,966,224)
Interest Expense ............................................ (121,436)
-----------
Loss from continuing operations ............................. (2,061,732)
-----------
Discontinued operations:
Cement ................................................... (62,487)
Containers ............................................... (241,208
Investment in Duck Farm .................................. --
-----------
Loss from discontinued operations ........................... (303,695)
-----------
Loss before income taxes .................................... $(2,365,427)
===========
Identifiable assets:
Continuing operations .................................... $ 787,920 $ 710,307 $ 1,498,227
Discontinued operations:
Cement ................................................ 395,955
Containers ............................................ 8,560,939
Investment in Duck Farm ............................... --
-----------
10,455,121
Corporate assets ......................................... 170,259
-----------
$ 10,625,380
===========
Supplemental information
Depreciation ............................................. $ 41,395 $ 420 $ 41,815
=========== =========== ===========
Capital expenditures ..................................... $ -- $ 3,363 $ 3,363
=========== =========== ===========
F - 26
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
13. SEGMENT INFORMATION - continued
The following is a summary of information regarding the Company's
continuing operations by geographical area for each of the three years
ended December 31, 1998:
1998 1997 1996
---- ---- ----
Revenue:
North America .......................... $ 312,119 $ 360,030 $ 342,112
Hong Kong .............................. 8,511 211,891 86,746
------------ ------------ ------------
$ 320,630 $ 571,921 $ 428,858
============ ============ ============
Operating income (loss):
North America .......................... $ 80,714 $ 116,404 $ 91,351
Hong Kong .............................. (517,958) (170,407) (186,859)
General corporate expenses ............. (639,889) (1,163,415) (1,966,224)
------------ ------------ ------------
$ (1,077,733) $ (1,217,418) $ (2,061,732)
============ ============ ============
Identifiable assets:
North America .......................... $ 703,003 $ 803,754 $ 787,920
PRC .................................... -- -- 8,956,894
Hong Kong .............................. 474,435 1,531,620 710,307
Corporate assets ....................... 38,328 52,688 170,259
------------ ------------ ------------
$ 1,215,766 $ 2,388,062 $ 10,625,380
============ ============ ============
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the SFAS No. 107
"Disclosure about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
F - 27
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS-continued
The carrying amounts of cash and cash equivalents, short-term borrowings,
current portion of mortgage loans payable and margin loan payable, are a
reasonable estimate of their fair value due to the short maturity of the
instruments. The fair value for the available-for-sale securities is based
primarily on quoted market prices and such securities are carried at fair
value.
15. COMMITMENTS AND CONTINGENCIES
The Company had no capital commitments as of December 31, 1998.
The Company leases land in North Vancouver, British Columbia on which the
Company's rental property is located. The annual rent of CDN$110,000
($71,115) is fixed until May 31, 2010. The Company has the option to extend
the lease to May 31, 2032 at a rent to be negotiated.
Total rental expense charged to operations was $85,365 in 1998, $125,201 in
1997 and $131,813 in 1996.
At December 31, 1998, the minimum future rental commitments under
non-cancelable leases payable over the remaining lives of the leases are:
1999 $ 71,115
2000 71,115
2001 71,115
2002 71,115
2003 71,115
2004 through 2010 456,321
---------
$ 811,896
=========
F - 28
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
16. SUBSEQUENT EVENTS
(a) On January 18, 1999, the Company entered into an agreement with SAR
Trading Limited ("SAR") wherein SAR agreed to buy and the Company
agreed to sell all of its interests in the majority of its
subsidiaries for approximately $4,838,000 in the form of the
assumption of certain liabilities. In consideration of the assumption
of liabilities, the Company agreed to issue two notes payable to SAR
in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is
immediately convertible into 20,000,000 common shares of the Company.
The $3,838,000 note can be converted into shares of common stock of
the Company, in minimum increments of $250,000 each, at the average 15
day trading price at the option of the Company by giving seven trading
days notice in writing to SAR. SAR is owned 100% by Fai H. Chan. The
agreement is subject to shareholder approval. On June 18, 1999, the
Company agreed to offset the amounts due from related parties
resulting from the sale, of $1,365,278 with the $3,838,000 note
payable.
(b) On February 5, 1999, 13,700,000 shares of common stock of the Company
were issued to SAR in exchange for forgiveness of debt of $685,000.
At December 31, 1998, the unaudited pro forma effect of the above events as
if they had occurred on that date and assuming all notes are converted into
common stock is summarized as follows:
December 31, December 31,
1998 Pro forma 1998
(actual) adjustments (pro forma)
------------ ----------- -----------
Total assets ............................. $ 1,215,766 $ 185,690 (2) $ 36,178
(1,365,278)(3)
=========== =========== ===========
Total current liabilities ................ $ 5,283,697 $ (685,000)(1) $ 109,916
(4,488,781)(2)
Mortgage loans payable ................... 710,277 (710,277)(2) --
Notes payable ............................ -- 3,838,000 (2) 2,472,722
(1,365,278)(3)
----------- ----------- -----------
Total liabilities ........................ 5,993,974 2,582,638
----------- -----------
Shareholders' deficit .................... $ (4,778,208) 685,000 (1) $(2,546,460)
1,546,748 (2)
=========== =========== ===========
F - 29
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued
(United States Dollars)
16. SUBSEQUENT EVENTS - continued
(1) To reflect the effect of the issuance of 13,700,000 shares of
common stock of the Company in exchange for forgiveness of debt
of $685,000.
(2) To reflect the effect of the sale of all the interests in
majority of its subsidiaries by way of the assumption of the
liabilities and the effect of the issuance of the note payable
and the conversion of the $1,000,000 note into 20,000,000 common
shares of the Company.
(3) To reflect the effect of setting off the amounts due from related
parties with the $3,838,000 note payable. The amounts due from
related parties arise from the de-consolidation of the
subsidiaries sold and represented intercompany receivables.
(c) On February 12, 1999, the Company entered into a Technology License
and Services Agreement (the "Agreement") with Cyber Construction
Company, Inc. ("Cyber"). Cyber has developed and continues to develop
certain software applications, methods, operating procedures, Internet
infrastructure design and Internet site template development
(collectively the "Technology"). The Agreement grants a
nontransferable license to the Company to use and execute this
Technology developed by Cyber, along with related services, for the
Company's customers. The Company agrees to grant and transfer to
Cyber, as a consideration of the license and related services, its
preferred stock with a face value of $10 million, as part of an
issuance of up to $50 million of its preferred shares. The Company has
agreed that upon the sooner of (i) the licensing or acquisition of
technologies utilizing the $50 million proceeds from the sale of
preferred shares; or (ii) February 13, 2001. The transaction
contemplated by the agreement has not yet been consummated and
consequently, has not yet been recorded.
F - 30
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
3.1(a) Certificate of Incorporation of registrant, as amended,
incorporated by reference from Form 10-K for the year ended
December 31, 1996.
3.1(b) Agreement and Plan of Merger, as amended, incorporated by
Reference from the Company's Annual Report on Form 10-K for the
Year ended December 31, 1996.
3.2 Bylaws of registrant, as amended, incorporated by reference from
the Company's Annual Report on Form 10K for the year ended
December 31, 1996..
10.1 Wuhan Container Acquisition Agreement incorporated by reference
to Exhibit 2 of the registrant's Current Report on Form 8-K filed
with the SEC on September 20, 1996, as amended.
10.2 Consulting Agreement between registrant and Thomas E. Waite
incorporated by reference to Exhibit 4.1 of the registrant's Form
S-8 filed with the SEC on March 20, 1997.
10.3 Consulting and Management Agreement between Heng Fai Management,
Inc. and Tight Hold Investment Limited dated November 4, 1996
incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
10.4 Agreement between the Company and SAR Trading Limited, dated
January 18, 1999.
10.5 Agreement between the Company and Cyber Construction Co., dated
February 12, 1999.
10.6 Assignment Agreement between the Company, SAR Trading Limited and
Mr. Fai H. Chan, dated June 18, 1999.
10.7 Agreement to Cancel Management Contract between the Company and
Heng Fung Management, Inc., dated June 18, 1999.
10.8 Amendment to Asset Sale Agreement between the Company and SAR
Trading Limited, dated June 18, 1999.
21 Subsidiaries of the registrant.
27 Financial Data Schedule.
26